Microfinance for the poor or the rich

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Anyone interested in large scale business approaches to development should read Business Week’s recent article on The Ugly Side of Microlending, which profiles Banco Azteca. With an average loan size of $257, Azteca would certainly be considered a Microlending Institution. However, its for-profit structure (controlled by Mexican tycoon and billionaire Ricardo Salinas Pliego), aggressive lending practices, and market positioning in consumer goods do not conform to the stereotypical Microlending profile.

Azteca lending occurs exclusively within the glowing storefronts of sister company Elektra, which sells electronics and other home goods. Typical purchases include stereo systems, bicycles, televisions, furniture, etc. Although some items in Elektra could certainly be used for production, the focus is definitely on consumerism. Banco Azteca, owned by the same parent, conveniently offers Elektra customers financing options for purchases. I’ll list a couple of the aggressive lending practices without going into extensive detail (again, I highly recommend the article).

  • Aggressive marketing: anecdotal evidence suggests that customers are rushed into borrowing decisions and don’t always understand the implications of all loan terms
  • Misleading quoted interest rates: quoted interest rates are applied for the entire term of the loan to the original principal; this means that if you borrow $100 and pay off $50, you continue to pay interest on $100 until the loan is fully paid; Total interest rates (APR) are consequently between 80% and 110%, although Azteca quotes 55%; U.S. law requires banks to disclose APR to customers, although Azteca provides no fair measure of the real cost of financing
  • Aggressive securitization: borrowers post all personal possessions as collateral against loans; if you stop paying, Azteca comes and carts away stereos, refrigerators, furniture, and anything else you own of value; goods are resold in Elektra’s used section

Consumer advocacy in Mexico is not as strong as in the United States, and clearly, many of these practices would be deemed exploitative/illegal within a stronger regulatory system. Last year, instead of complying with a new law requiring greater disclosure of financing costs to borrowers, Azteca went to court and won individual protection from the law. This development brings up a different but related theme regarding the growing power of extremely wealthy individuals in developing countries (e.g. Salinas) and their ability to control public institutions. The richest man in the world, Carlos Slim, is Mexican.

The Azteca phenomenon reminds us to be careful when thinking about microfinance and base of the Pyramid business in general. Clearly the econ 101 model that says that any competitive business is inevitably good for the consumer is flawed. In this case, borrowers have extremely limited financial savvy and face extremely sophisticated marketing. Is credit always good for the poor? No. I know I’m running a fine line because I also believe strongly that the poor need to make their own decisions and learn to improve their own lives. As a general rule, the rich will not take care of the poor. The poor must take care of themselves. Part of that means making good credit decisions.

Nonetheless, some basic common sense should be applied. Common sense suggests that not all credit is pro-poor credit.

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2 Responses to “Microfinance for the poor or the rich”

  1. More on Azteca/Elektra « Great significance Says:

    […] on Azteca/Elektra This post is a follow-on from an earlier one about Banco Azteca. I had the good fortune of meeting a former Banco Azteca employee. He was the […]

  2. Vices of the market « The Invisible Hand, in your pants Says:

    […] our post on Banco Azteca for more perverse market energy (mis)directed at the base of the […]

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